Despite her well-known opposition to the system of "tied aid", Ms Short says she will not drop Britain's involvement unless other Western countries agree to do the same.
The Government has been pushing for a deal allowing some of the poorest countries in the world to shop around with their international aid, to get better value for money. But its plans collapsed at a recent meeting of the OECD when France and Japan refused to sign up.
Now Ms Short has ruled out any unilateral move by the UK which means 14 per cent of Britain's long-term aid budget will remain tied to British products and service providers for 20 years. The Government has barred future tied-aid projects.
In a separate move the charity Action Aid is bringing a case to the European Court of Justice in a bid to make the practice of tying aid to deals with specific national companies illegal across Europe.
At the moment about one third of the pounds 13bn aid to developing countries is given on condition that the money is used to purchase services and products from the donor countries.
The World Bank estimates that tied aid reduces the real value of the grants by about 25 per cent.
Ms Short, who is passionately committed to untying aid, is thought to be "unhappy" about the failure of the OECD talks but insists Britain must maintain its multi-lateral approach to unravelling the problem.
In the UK the biggest benefactors from tied aid are the British Council, which received 78 Department for International Development (DFID) contracts last year, Population Services International, which currently has a pounds 11m contract to provide contraceptive advice in Nigeria, and Arthur Andersen, which has a pounds 5m contract to provide advice on privatisation in the Indian power sector.
Ms Short recognises this system is inefficient and leads to ludicrous situations where spades are purchased in donor countries 20 per cent more expensively than they could be in the country where they are needed. In a recent speech Ms Short described aid tying as a "dinosaur" and said that she was "amazed that the practice persisted as we approach the new millennium".
She added that aid tying was a "classic case of mixed motives. It signals that the donor countries' major concern is not development, but the next contract."
Jeffery Chinnock, the co-author of a recent Action Aid report, Purchasing Power on Tied Aid,insisted that Britain's bargaining position would not be jeopardised by a unilateral untying of aid.
"Ms Short talks about dinosaurs but her policy shows those dinosaurs still have some influence. The UK doesn't want to untie its aid unilaterally because of fear it will disadvantage British companies - we don't believe it would."
One of the most striking examples of British tied aid is a family planning service in Malawi. All the products in the programme including pregnancy tests had to be bought in the UK - near their expiry dates - instead of locally, massively inflating the costs of the goods that had to be shipped to Malawi.
Ms Short's spokesman said: "Personally Ms Short is very much against tied aid but she knows it is no good doing something unilaterally, and by their very nature multi-lateral arrangements take time.
"We understand the position that Action Aid takes and respect the work it has done but we don't want to go down that unilateral route and it doesn't solve anything."Reuse content